What is the difference between a stop and a plan?

A stop answers exactly one question: when am I wrong? That's a valuable question and a small one. A plan answers all the others, and answers them before capital is committed — which is the only time you can answer them calmly.

What a stop leaves undecided

• The entry trigger — what must happen for the setup to become a trade, as opposed to something you're watching.
• The size, which follows from the stop (Unit 1) and not from enthusiasm.
• Whether the stop moves, when, and by what rule.
• Where profit is taken, in whole or in parts.
• The time stop — how long the trade gets to do something before the capital is better used elsewhere. Most entry premises have an implied horizon; a trade that hasn't moved in twenty bars usually falsified that premise without ever touching the price stop.
• The gap policy — what exposure is carried into scheduled events (Lesson 1 of this unit).
• The total open risk — the sum of (entry − stop) × shares across every open position, with positions that move together counted as one. Unit 1's fraction was per trade. Eight positions each risking 1% is 8% of equity resting on stops, and if the eight are one sector, one index or one currency, a single overnight move can take all eight stops in one session. The account-level limit below acts after that session; this number acts before it.
• The account-level limit — the daily or weekly loss at which trading stops entirely, regardless of how good the next setup looks. This is the only rule that protects against the specific failure of a bad day becoming a catastrophic one.
• The non-price invalidation — what would make you exit even though the stop hasn't been hit, because the reason changed.

Trailing and scaling, priced in R

Both of the popular "manage the winner" techniques change the arithmetic, not just the feel. Using R for the amount risked (formalised next unit): entry $100.00, stop $96.00, so 1R = $4.00.

• Plan A — all out at the target $112.00. Result: +3R.
• Plan B — half out at $108.00 (+2R), trail the remainder. The trail exits at $110.00 (+2.5R). Blended result: 0.5 × 2 + 0.5 × 2.5 = +2.25R.

Holding the whole position to that same trail exit would have returned +2.5R. So on this path, scaling out cost 0.25R and bought a smoother equity curve and an earlier "win." That is a real trade, and it is the typical one: scaling out raises how often trades feel successful and lowers the average size of the successes — which moves expectancy directly.

A trailing stop has the same shape of trade-off. It converts unrealised profit into a floor, and by construction gives back the distance between the high-water mark and the trail. Wide trails keep big winners and give back more; tight trails bank more often and cut runners short.

The pre-mortem

The single highest-value line in any plan is written before entry: "what would make me abandon this trade before the stop is hit?" Answered in advance, it's discipline. Answered mid-trade, it's improvisation wearing discipline's clothes.

Try it now

1. Write a six-line plan for a hypothetical trade on the chart below — entry trigger, stop, size, first target, trail rule, time stop — choosing an entry bar somewhere in the middle and writing every line before you look at what the chart does after it.

2. Express the stop and the target as R values, then compute the blended result if you took half off at the target and the remainder trailed out halfway between the target and the entry.
3. Add the line most plans lack: the account-level daily loss limit at which you'd stop trading, expressed both in dollars and in R. Notice that it's a number, and that you can only choose it while nothing is happening.

Unit done. Next: the math that decides whether any of this adds up to an edge.